Blockchain and Network Effects

September 19, 2017

How do you incentivize early adoption with finacial incentives?


The Network Effect: The more people who participate in a network, the more useful that network is.

The Problem with Network Effects:

  1. Early Adoption— historically, the hardest part of creating a network effect is starting a network. A network only becomes truly valuable at scale when there are many participants; consequently, there is very little incentive to be an early adopter as the benefits of that network are only realized with many more participants (ex. Facebook is not very usefully if you’re the only one using it).

  2. Monetary Value Extraction — Network effects socially benefit network participants but financially benefit network owners. The monetary value created by a network is extracted from that network to its owners (ex. While any given Facebook user benefits from the other billion Facebook users, users are not the ones realizing financial gain, Facebook (the corporate entity) is).

The Blockchain Effect on Network Effects:

The Blockchain effect fundamentally flips the two problems of network effects around in the following ways:

  1. Monetary Value Inclusion — blockchain protocols transition financial benefit of a network effect from network owners to network participants.Network participants retain the social benefits and also retain financial benefits. The distinction between network owners and participants in a properly incentivized blockchain network is opaque; network participants become network owners.

  2. Incentivize Early Adoption — blockchain and token economics consequently incentivize early participation in a network. As the difference between ownership and participation converges in these networks, early participants realize the largest reward from a fully substantiated network effect. Specifically, while the social benefit for early adopters is just as limited as it was before, the financial benefit for early adopters is drastically changed. Early adopters can balance the downside of limited social utility without network effects with the promise of greater future financial utility as network effects are established.

"It might make sense just to get some [bitcoin] in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy — Satoshi"

Inspired by: Michael Karnjanaprakorn |Fat Protocols


2nd Order Effects — Beneficence of the Commons

Tragedy of the Commons occurs in networks where independent network users, acting in their own self-interest, do so to the detriment of the overall collective network. The more self-interested independent network users that act in this manner in shared resource systems, the greater the potential tragedy of the common.

People will always work in their own self interest. Such selfish behavior is hard to change, but incentives and payouts can alter what it means to act selfishly.

In a token environment, because there exists a convergence of network users and network owners, principal-agent tensions are mitigated and incentives are aligned such that independent self-interested network users who work for their own individual gain simultaneously benefit the overall network.

By changing the underlying incentive structure of the Commons to align people’s self-interest with the collective-interest, the same self-interested actors that caused negative externalities in the form of Tragedy of the Commons now foster positive externalities in the form of ‘Beneficence’ of the Commons.

A “Public Good” has historically been defined as:

a commodity or service that is provided without profit to all members of a society

This fundamental denotation of a “public good” may change. No longer will public goods be provided without profit to those contributing to and using them. The transition from tragedy to beneficence of the Commons is the key to unlock the the framework to unprecedentedly fund public good.